If you are thinking of getting a loan for your business, these are all of the relevant advantages and disadvantages that you need to take into consideration before making your decision.
Plenty of options
There are numerous different options when it comes to business loans. That’s one of the best advantages of business loans- you have a wide range of options to choose from. You are meant to choose the one that suits your business most. When choosing a type of loan you are going to take there are two main options you can consider:
- Capital loans- support your business’s cyclical or monthly capital costs
- Lines of credit- boost your business’s working capital for equipment, inventory as well as cash flow needs
Once you know what option you are going to go for, you need to pick the provider suitable for the type of loan you picked. The best way to make the right decision is to thoroughly go through the options you have and compare their loan security requirements, terms, and the lender’s reputation. The most common mistake among small business owners who are taking loans is taking only banks with competitive rates and variable loan terms into consideration.
Lower interest rates & flexible payment terms
Bank loans do tend to be harder to obtain and the application process is a bit complex, but what’s good about them is that they offer somewhat lower interest rates than other lenders out there. Most of the banks will offer you the so-called “no maximum loan” that comes with a maximum of 25 years payment option.
You have a chance of getting secured loans with an interest rate as low as 5.85%. On the other hand, there are also loans that aren’t solely based on interest rates. In some cases, you can get a fixed total payback amount that lets the borrower know what the total cost of the loan is upfront. This kind of a loan is immune to interest rate fluctuations.
Fast approval and availability of funds
Many lenders can offer you professional consultations and give you valuable advice of what your borrowing capacity is in a short, quick and effective way. To make sure that the process goes smoothly and as quick as possible, you need to provide the following information:
- The purpose of the loan (i.e. inventory, equipment, or operational costs)
- Type of business
- Loan security (depending on whether you can offer collateral)
- Bank account details
With professionals such as Sparrow Loans your application process can run smoothly and you can get all the information you need within minutes.
Lastly, the actual part of the loan that goes into your working capital inventory is treated as taxable income, even though the business loan itself is not taxable income. For that reason, you need to document all of your loans and when you’re submitting your tax return make sure to apply for the applicable deductions.
Most banks favour secured loans
The downside of bank loans is that banks are mostly looking to give secured loans. That means that most small businesses are not able to get loans from the majority of the banks since these kinds of businesses don’t exactly have the means to purchase and maintain real-estate properties. This makes them ineligible for getting loans from the banks. You can find a small number of banks that do offer non-secured loans but the amount is lower in most cases and you will be required to provide repayment in a shorter time.
Preference is given to established businesses
In addition to banks giving secured loans only, most banks will also opt for giving a loan to an already established businesses. Rarely will it occur for a bank to give a loan to a small business that is just starting out. So, keep that in mind.
Lack of choice for small-business loans
All of the points mentioned above are what makes it so hard for small business owners who are just now starting their business to find a loan suitable for their company. Options are significantly limited and it can be very challenging to find a bank that will be willing to provide a loan for a small business that hasn’t yet fully been established.
Most of the banks have very strict criteria when giving out loans such as hard assets, a minimum two years’ tax statements, and a flawless credit rating. However, if you know where to look online, you can find some financial institutions that offer loans that are easier to obtain and by using online prequalification.
Loans do not guarantee business improvement
Lastly, you need to keep in mind that getting a bank loan cannot guarantee your business’s success. For that reason, you need to make the needed adjustments to your business plan and stop using the loan if it offers no value for money.
All in all, there are certain advantages and disadvantages of getting a business loan. If you decide to try it out, make sure you thoroughly research your options beforehand.